Investing in Trump was too risky for some on Wall Street

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Last month, Donald Trump’s fledgling social media company announced that it had lined up $US1 billion ($1.4 billion) from 36 investors. The size of the deal, the former president said in the announcement, signalled that his startup’s plan to end the “tyranny” of Big Tech had significant support.

Getting there was no slam dunk.

Despite the opportunity to invest in a deal whose terms were structured to make a profit for investors, many of Wall Street’s big names passed on investing in Donald Trump’s social media company.Credit:AP

Beginning in the fall, bankers for the company, Trump Media & Technology Group, approached dozens of investors pitching the $US1 billion deal, which offered them lucrative financial terms. By then, the startup — intended partly as a conservative alternative to Twitter — had separately raised roughly $US300 million through its planned merger with a special purpose acquisition company.

Those willing to put up at least $US100 million, Trump Media’s bankers told potential investors, would get a call from Trump, said five people who were briefed about the pitches but were not authorised to speak publicly. Despite the opportunity to invest in a deal whose terms were structured to make a profit for investors, many of Wall Street’s big names passed.

More than a dozen well-known hedge funds and investment firms were hesitant to go into business with Trump, people briefed on the matter said, because any association with him could risk alienating their investors, which often include public pension funds and foundations. Others were wary of Trump’s history of corporate bankruptcies and disputes with lenders and partners, and concerned that details about his media company were scant.

At the moment, Trump Media — which hired former Representative Devin Nunes, a staunch Trump ally, as CEO in December — has no disclosed revenue or products.

Among the funds that turned down Trump Media’s bankers were Millennium Management, a $US57 billion hedge fund; Hudson Bay Capital, a $US15 billion hedge fund; and Balyasny Asset Management, a $US10 billion hedge fund. Apollo Global Management, the big private equity firm, also passed, a person briefed on the matter said. The deal on offer is known as a “private investment in public equity,” or PIPE, which gives certain investors discounted shares in a public company.

People close to the three hedge funds did not explain why the firms had chosen not to invest.

Highbridge Capital Management, a hedge fund unit of JPMorgan Chase, the nation’s biggest bank, had bought shares in the initial public offering of Digital World Acquisition, the SPAC that later agreed to merge with Trump’s company. However, Highbridge didn’t go into the PIPE deal because of the optics of doing business with Trump, one person familiar with the decision said. Investors who buy shares of a SPAC don’t know what company it will end up merging with, which is why they’re often called “blank cheque” companies.

A spokesperson for JPMorgan declined to comment.

“Investors have different risk preferences, including reputational as well as financial risk. If the deal is sweet enough, then the bankers will find someone who is likely to bite.”

Nunes did not respond to emails seeking comment sent to his Trump Media address and the general company address. Liz Harrington, a spokesperson for Trump, also did not respond to requests for comment.

A lawyer for Trump Media and two bankers at EF Hutton, the small investment bank that arranged the financing and recently took the name of a once storied Wall Street firm, either declined to comment or did not return requests.

Trump Media agreed to merge with Digital World in October, raising $US293 million. On December 4, the Trump company announced that it had lined up an additional $US1 billion through the PIPE deal. Three dozen investors signed up, according to filings with the Securities and Exchange Commission, although they will have to turn over that money only if Trump Media’s merger with Digital World closes. Currently, that merger is under regulatory investigation. Its outcome will determine whether the deal can go through.

Among the bigger investors: Pentwater Capital, a $US10 billion hedge fund in Naples, Florida, and Sabby Management, a hedge fund in Upper Saddle River, New Jersey, that manages more than $US500 million, several people who were briefed about their involvement said. The amounts that Pentwater and Sabby invested couldn’t be learned.

“Investors have different risk preferences, including reputational as well as financial risk,” said Usha Rodrigues, who teaches corporate law at the University of Georgia School of Law. “If the deal is sweet enough, then the bankers will find someone who is likely to bite.”

Despiute the controversy, Digital World shares are trading at around $US80, much higher than the $US10 price of the SPAC’s initial public offering.Credit:Bloomberg

In the days before Trump Media announced its $US1 billion financing, the former president called a handful of hedge funds, family offices and others who had signalled they would invest at least $US50 million each, two people briefed on the matter said. The calls were intended as both a deal sweetener for larger investors and an opportunity for them to ask Trump questions about the startup’s plans before they made plans to invest, several people said.

Early on, Trump Media bankers told some prospective investors that they would get a call from Trump if they put in $US100 million, according to interviews with those investors. Later on, other investors were told that $US50 million was enough for a call.

The roughly $US1.3 billion raised by the two deals would provide Trump with funds to get his company going. But before a single dollar can hit Trump Media’s balance sheet, its deal with Digital World must overcome scrutiny by securities regulators. The SEC is investigating some of the events leading up to the October 20 announcement of Trump Media’s planned merger with Digital World.

Regulators opened the inquiry after The New York Times reported that the CEO of Digital World, Patrick Orlando, had talks with representatives of Trump Media as far back as March and had never disclosed that to investors — potentially flouting securities regulations. Regulators are also looking into trading in Digital World securities that happened before the merger announcement.

If regulators approve Trump Media’s merger with Digital World, investors in the $US1 billion private deal stand to do well whether or not the company thrives. As part of the deal, investors get to buy shares of Trump Media for roughly 40 per cent less than the prevailing market price. If the shares rise, they can profit from the rally. If the shares fall, their chance of losing money is significantly lower than that of the company’s other investors.

The investors also have the right to “short,” or borrow stock to bet on a fall of Trump Media shares, as a further protection against the risk of a price decline.

In the meantime, retail investors have turned Digital World into something of “meme stock,” propping up its share price partly because of its association with Trump. Shares trade around $US80 — much higher than the $US10 price of the SPAC’s initial public offering.

This article originally appeared in The New York Times.

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